EUR/USD Forecast – Firmer Growth and Inflation Outlook in the U.S. Driving Treasury Yields Higher

The Euro is inching lower against the U.S. Dollar in a lackluster trade on Monday with volume well below average because of a U.S. bank holiday.

When traders return in full force on Tuesday they’ll be dealing with the prospect of higher Euro Zone government bond yields as they remain close to their highest levels in over a decade, as investors recently scaled back expectations of a short monetary tightening cycle.

The current repricing is not expected to ease either over the near term, given continued concerns over wage dynamics in the Euro Zone region and its implications for persistence in underlying inflation.

At 17:07 GMT, the EUR/USD is at 1.0690, down 0.0005 or -0.05%. On Friday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $98.70, up $0.18 or +0.18%.

But the issue of higher rates is not just a Euro Zone problem because the U.S. has re-entered the game. A firmer growth and inflation outlook in the U.S. has been driving up Treasury yields as well as the global fixed-income markets.

Hawkish Fed member chatter has also been offsetting the European Central Bank’s hawkish remarks.

According to the ECB short-term Euro rate (ESTR) forwards, the ESTR will peak in September at 3.6%, implying expectations for a depo rate of around 3.7%. Meanwhile, Fed funds futures traders are now pricing for the fed funds rate to reach 5.29% in July, and remain above 5% all year.

The Fed’s target range currently stands at 4.5% to 4.75%. It’s the rapid rise in expectations to 5.29% that’s been driving the EUR/USD lower.

Daily EUR/USD Technical Analysis

The main trend is down according to the daily swing chart. However, momentum may be getting ready to shift to the upside, following Friday’s potentially bullish closing price reversal bottom.

A trade through 1.0613 will negate the chart pattern and signal a resumption of the downtrend. A move through 1.1033 will change the main trend to up.

The minor trend is also down. A trade through 1.0804 will change the minor trend to up. This will confirm the shift in momentum.

On the downside, the nearest support is a 50% level at 1.0661. On the upside, the closest resistance is a minor pivot at 1.0709, followed by a 50% level at 1.0758.

Daily EUR/USD Technical Forecast

Trader reaction to 1.0661 and 1.0709 is likely to determine the near-term trend in the EUR/USD.

Bullish Scenario

A sustained move over 1.0709 will indicate the presence of buyers. If this move creates enough upside momentum then look for a near-term surge into 1.0758.

Bearish Scenario

A sustained move under 1.0661 will signal the presence of sellers. If this move generates enough downside momentum then look for a near-term break into 1.0613.